I had a comment to a post I wrote last year over the weekend. This person stated, “As a non financially educated guy, I have a really hard time understanding how people in the same industry can have such varying opinions how to insure oneself.”
This question was aimed right at the heart of the term insurance versus whole life insurance question. If you talk to an agent that lives and breathes whole life, you would think term is a waste of money. If you talk to an agent that sells term insurance and non cash value permanent policies, well, you might wonder just what is motivating a whole life loving agent.
I can you tell you that the answer to the varying opinions can be as simple as where the agent got their first exposure to life insurance. Was it from an independent agent or from a captive New York Life agent? It can also come from their personal experience or study of the two different ends of the life insurance spectrum. Have they really thought through all of the scenarios for pros and cons of both products? What do they own on their own lives? It can also, and I always catch a little flak over this, be a commission driven decision. Where is the agent going to make the most money regardless of whether it is the best thing for the client or not?
The life insurance business is not something that people just jump into and wing it. Most are attracted to the business by someone they know, often an agent that has just sold them life insurance. If it’s just a friend and not an agent they will often suggest you talk to someone they know in the business and your first exposure to life insurance will be through an agent of a friend. That agent will explain his or her philosophy about the best way to insure yourself or someone else and how to make money at it. If it’s an agent you just purchased from they are going to explain to you why what they just sold you is the very best thing that can be sold, and if you stick to it you will make money at it. Generally whichever agent wows them the most about the money side of things is the agent that will also mentor and imprint on the new agent’s brain the reason for doing it their way and never wavering. In most cases the veteran agent will get an override on everything the new agent does.
So, a life insurance agent is mentored and influenced by a company or an agent who passes on their values to someone they hope will be successful and make then plenty of money over the years. Their opinion is initially formed by whoever gets them into the business. If it is someone who believes in whole life then that new agent is likely to be a whole life agent. If it is someone who believes that fully guaranteed but non cash value products (term, no lapse ul) are best for the customer, then they are likely headed toward a career as an independent agent. Then there is a third group who learn one way or the other and after studying the reality of both, change their minds and set their sites in a different direction.
This whole question came from a person that is paying $900 a month for $500,000 of whole life insurance at 40 years old. He’s in great health and isn’t sure he’s doing the right thing. He also has a $750,000 20 year term policy that he is paying $45 a month for.
Now in all fairness the whole life policy has $21,000 in cash value in it. The guy was a little livid when he found out that his spouse wouldn’t get the death benefit plus the cash if he died. He said that it is at least a safer investment than the stock market so he wonders about buy term and invest the difference.
Bottom line. Ok, it was going to come down to my opinion on this at some point. He is currently spending $945 a month for $1,250,000 of life insurance. Since I firmly believe that not all life insurance needs are permanent, I believe this guy should get his $21k back, buy say $1,500,000 of 30 year term/ul for about $100 a month and if he really can’t find an investment that he is comfortable with, take the other $845 a month and put in under his mattress. I believe with all my heart that using life insurance to accrue cash value is stupid.
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
You definitely hit a home run on that one. Douglas Andrew in his book “Missed Fortune 101” recommends using hand-picked UL contracts with comparatively low death benefits to build large cash positions as an alternative to qualified retirement accounts. By borrowing from the policy in later years the dispersement is tax free. I have a friend who makes about $400,000 a year and had no tax shelters. Last year he told me he had only $500,000 in life insurance, and it was a 21 year old UL from Allstate that was nose diving toward lapse. He read the book, and later shared the book with me. Later he did a $400,000 cash out mortgage against his new free and clear home and is using those funds to load up a $2,400.000 State Farm UL as fast as he can without hitting the MEC threshold. I don’t know how it will pan out long term, but near term he is paying a life insurance premium with tax deductible 30 year fixed mortgage payments at a little over 4% while the money grows tax free on the back end at 4.5% minus insurance costs. His home is debt protected against lawsuits (he’s a doctor), and he’s got that home mortgage deduction. I don’t know.
Do the guaranteed values on the overpriced State Farm policy work out the way he needs it to? Anytime you end with something about his home being debt protected I have to wonder how thick the ice is he’s treading on.